There are few numbers in life that matter as much to your financial outlook and well-being as your credit score. However, confusion is the norm for consumers when it comes to this important financial gauge.The History of Credit Scores
Prior to the creation of standardized credit scores, lenders and loan officers would often develop their own "score card" to assess the risk of lending to a particular borrower. This score card was based solely on one's credit report and could vary drastically from one lender to the next. The major issue with this original method was that it was based on a loan officer's ability to judge risk, rather than a common set of rules and specific calculations.
So, in the 1970's, the Fair Isaacs Company set up the first credit scoring system in order to help remove the inherent inconsistencies that arose from having each lender perform their own credit diagnostics. It has since become known as the FICO score and the algorithm has been widely adopted by America's largest credit reporting agencies.Why Would My Score Differ Between Credit Agencies?
The three major credit bureaus are Equifax, Experian, and TransUnion. Simply put, the reason that the scores you receive may differ is that each score is dependent on the credit report that each receives and the scoring model they use.
In other words, Equifax might have not exactly the same information on you as Experian and vice versa. One credit bureau may be missing an account that either helps or hinders your score and will therefore report a different credit score than another credit bureau. If the system was perfect, this wouldn't happen. But since it isn't, you want to make sure that they all have the proper information by checking your three free credit reports every year at www.AnnualCreditReport.com.Why Would My Score Differ Between the Same Credit Agency?
Credit bureaus use many different scoring models, even within the same credit bureau. Each bureau can use dozens of different credit score models based on the requirements of different lenders.
Each credit score model has a slightly different formula that takes into account over 200 different factors of your credit report; like a thumbprint, no credit score model is exactly the same. In addition, credit scores can change anytime so you have to make sure you are comparing credit scores from the same day.
As an example, a mortgage company will get a different score than a company providing auto loans, since they are looking for different types of credit history and credit factors.Other Available Scores
While FICO is the most famous, there are several other versions and providers of credit scores, such as VantageScore, NextGen, BEACON, and EMPIRICA. Some scores are directly developed by credit bureaus, while others are developed by outside companies.Is there a "Best Score?"
In a word, no. In order to protect revenues, credit reporting agencies will often position their scores as the best or the most predictive. In reality, all scores must adhere to similar guidelines to be truly predictive, regardless of the final output number. All credit scores are built from the same base set of data and statistical procedures.
Like many products and services in the marketplace, there are a plethora of different options for you (and the businesses that serve you) to choose from, simply because every buyer is different. Based on cost and effectiveness in each buying situation, there are credit scores for sale to satisfy each customer.Score Ranges
Just as a point of reference, it may be important for you to know what the score rangers are for each of the major reporting agencies. While each agency uses internal predictors of certain events (e.g. how likely you are to file bankruptcy), the final credit score is not meant as a probability-meter for any specific event. In any case, the higher your score the better, as it is a general gauge of your overall credit worthiness in the eyes of lenders.
- FICO: traditionally between 300 and 850
- Experian: 330 - 830
- Equifax: 300 - 850
- TransUnion: 300 - 850
- VantageScore: 501 - 990 (often assigned a letter grade, A - F)
Because there are hundreds of credit scores that measure many different probabilities, consumers should not be overly concerned with the type of score or even their number. Rather, they should monitor changes within a single score.
It's also important to note that your credit score is a continuous variable which can change minute to minute. Every time your credit report changes, your credit score could change.
These complicated facets of credit scores are exactly why we developed Credit Karma. By keeping the bureau and credit scoring model consistent, we are hoping to provide consumers with a single, easier-to-follow point of reference on their credit health. Best of all, it's always free to check your credit score with us. In this way, you can update as often as you want and always have a consistent baseline to better understand how your score is changing and what you can do to make it better.
Update: Check out our new score summary page, which will compare your score to scores nationwide!